Headlines

* Biden, McCarthy work lawmakers to pass deal as default looms

* BoJ’s Ueda: Japan to patiently keep ultra-easy policy

* Gold sinks to 2.5-month low as USD pushes higher

* Asian stocks mostly higher as US debt deal revives confidence

FX: USD is pushing north to new cycle highs this morning. This came after a narrow range “inside” trading day and recent consolidation. Month-end flows may help shape trading ahead of Friday’s NFP. The 2-year yield recently surged higher to 4.63% and enjoyed twelve straight days of gains.  The 10-year yield hit 3.85% last Friday but has fallen since back to 3.76%. A tentative deal to raise the debt ceiling has been agreed.

EUR has broken support around 1.07 this morning and is down six consecutive days. There is not a lot of major support until 1.05. GBP is faling today as cable looks likely to test support just above 1.23. Loss of this points to more downside towards 1.22. The 100-day SMA is at 1.2289. USD/JPY is moving higher towards yesterday’s top at 140.91. Jawboning by the Japanese authorities may become louder. But any actual intervention may not come, until at least 145. AUD is falling toward 0.65 after consolidating around recent lows. NZD is making fresh lows today near 0.60. These levels were last seen in November 2022. USD/CNH has made new cycle highs at 7.1095 as the yuan wilts.

Stocks: US equities were closed for Memorial Day.

Asian stocks traded mixed with price action rangebound. Holiday closures in the US and UK mean cash markets have yet to react to the tentative debt ceiling agreement. The Nikkei 225 was choppy but remained above the 31k level. BoJ Governor Ueda repeated a relatively dovish message. The Hang Seng was cautious ahead of tomorrow’s PMI data.

US equity futures are in the green.  European equity futures are pointing to a higher open. The Euro Stoxx 50 closed off 0.4% yesterday.

Gold has broken down to $1934 this morning. The dollar is bid and US rates/yields remain near their recent highs. The 100-day SMA is at $1936. The halfway point of the March rally is $1935. The next Fib level of support is $1904.  

Day Ahead – Aussie inflation and China PMIs released overnight

As markets digest the debt ceiling news, we get important Asian data out later tonight. The monthly CPI for Australia is expected to tick higher to 6.4% from 6.3% previously when food prices saw notable gains. A weaker-than-expected print could confirm the bias from the RBA to pause at the next policy meeting on June 6. This would mean AUDUSD could also extend its down move further below 0.65 handle. Last week’s low was 0.6490. However, if the print is firmer-than-expected, it will complicate the task of the RBA.

Chinese PMIs will also direct AUD price action. April saw an unexpected contraction in manufacturing for the first time this year. But this is set to return to expansion this time. However, the softness could put pressure on wages and slow retail sales, while hurting AUD and EUR too. This could prompt China government stimulus measures to bolster both sectors going forward.

Chart of the Day – AUD/USD consolidating near lows

Progress on the debt ceiling deal has not had a major impact on FX markets very recently. Instead, US yields have moved to new highs as markets focus on sticky inflation. There is now above a 60% chance of a 25bp June Fed rate hike. That 14 June meeting is likely to see inflation forecasts lifted and may sustain the bid in the greenback, especially on the back of another solid NFP report.

AUD/USD broke down last week through the year-to-date lows around 0.6563/73 after sideways trading for a few months. Prices have been consolidating over the last few days below a Fib level (61.8%) from the October rally at 0.6547. Buyers have tried to push above here and back into the long held range over the last couple of sessions but failed. A break below Friday’s low at 0.6490 sees 0.6386 as next major support.